The State as Owner – China’s Experience


Curtis J. Milhaupt
William F. Baxter-Visa International Professor of Law, Stanford Law School


Time to read

2 Minutes

Once nearly consigned to the junk heap of economic history, the state-owned enterprise (‘SOE’) has staged a remarkable comeback in the first decades of the twenty-first century. Much (though not all) of the resurgence of the SOE is a result of China’s remarkable rise since the launch of its economic reform program four decades ago. An OECD (2017) study of seven non-member countries as of the end of 2015 found that China accounted for over 75 percent of the 628 listed companies with majority or minority state shareholdings and almost 85 percent of their combined market value of approximately $4 trillion. Notwithstanding the emergence of a vibrant private sector in China, SOEs remain an important component of the country’s domestic economy and stock markets: listed companies with more than 20 percent state ownership account for 40 percent of total market capitalization and over half of listed company revenues in China (Rosen et al., 2018). Chinese SOEs are also increasingly important actors in the global economy. In 2005, less than one-third of the SOEs in the Fortune Global 500 were Chinese; by 2014 the proportion had risen to two-thirds (Kwiatkowski & Augustynowicz, 2015).

In a recent essay prepared for a volume on corporate ownership in the Oxford Economic Policy Review (vol. 36(2), Summer (2020)), I explore China’s experience with state ownership of business enterprise. The essay provides an overview of the creation, ownership structure, financing, performance, corporate governance and role of SOEs under Chinese state capitalism.

China’s SOEs emerged out of a process of ‘corporatization without privatization’ (Howson, 2017).  Corporatization refers to the process of transforming an SOE from a unit of government into a joint stock corporation with a board of directors and shares issued to the government, in an attempt to separate the government’s dual roles as investor and regulator. China’s stock markets were established principally to provide a means of funding SOE restructuring. State-run businesses were hived off of government bureaus, cloaked in corporate form with the standard set of attributes provided by a newly adopted Company Law, arranged into groups, and the best assets were packaged for listing on the stock exchanges. Minority non-state investors purchased equity in the listed firms, resulting in a mixed-ownership form of enterprise.

Following a business group formation strategy found in other East Asian countries, Chinese SOEs at the central government level are structured as business groups under a parent holding company, the sole shareholder of which is an agency directly under the State Council. One or more of the parent holding companies is listed on a stock exchange in mainland China and often cross-listed in Hong Kong or a foreign stock exchange. Similar structures are used for ‘local SOEs’ at the provincial and municipal level. Serious corporate governance issues are raised by this ownership structure, which bears resemblance to ownership structures in other controlling shareholder regimes, with the added concern that the controlling shareholder is an authoritarian political regime.

By a variety of measures, China’s state sector significantly underperforms the private sector, and the performance gap is widening. The Chinese government is pursuing two strategies to reform its SOEs: (1) injecting more private capital into the state sector to improve market discipline and professionalization of management and (2) elevating and formalizing the role of the Chinese Communist Party in their corporate governance. These reforms underscore the serious tension inherent in the party-state’s dual objectives of owning SOEs as a means of building state assets while simultaneously maintaining them as an important tool for advancing non-financial social and industrial policy goals.

Relying on a strategy of mixed ownership and extensive use of the capital markets, coupled with non-corporate, political governance mechanisms, Chinese SOEs represent a novel take on an old form of economic actor. They raise important questions about the future direction of China’s domestic economy and the ability of global economic regulatory regimes to accommodate this new-old form of economic organization. In addition, Chinese SOEs prompt reflection on the corporate form itself, highlighting its adaptability and utility as a platform for business organization across a wide range of political economies, including that of an authoritarian developmental state.

Professor Curtis Milhaupt is the William F. Baxter-Visa International Professor of Law at Stanford Law School.


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